Discussion:LLC C Corp to LLC Partnership

I have searched ALL of the topics and have not found any discussion on this topic.

A recenty acquired client here in San Diego, California elected LLC Corp status but now would like to be treated as a Partnership. It has been more than 5 years since this election.

The assets in this LLC are all real property, and they would like to sell it all.

Issues:

1. Can the election to be treated as a Corp be undone in time to avoid double taxation on the sale of Real Property?

2. What is the procedure for revoking this election?

3. If the election to be treated as a Corp is revoked, will the assets in the LLC be subject to Built-in Gains?

From what I have read in the discussions it seems that once Corp status is elected using Form 8832, liquidation is required in order to change back to LLC Partnership. Is this correct?

What is the best course of action for this LLC? Sell as is, revoke election, elect S status, liquidate?

Thank YOU in advance!

See the following thread:

Discussion:Selling_a_C-Corp_or_Asset

http://www.taxalmanac.org/index.php/Special:Search?search=shotgun&ns110=1&searchx=Search

I told you in my first post that revoking the election to have the LLC taxed as a corporation is tantamount to liquidating the corporation. It is a twice taxable transaction. The asset gets distributed out of the corporation at FMV and the corporation recognizes taxable gain. BANG. You just shot yourself in the foot. The RE distributed out to the shareholder(s) is treated as a taxable dividend to them. BANG. You just shot yourself in the other foot.

The point is that there is no good solution for your client with RE inside a C corporation. The tax consequences are ugly. You indicated in your orginal post that you have searched everything but could find nothing on point. You must not have searched very hard because there are plenty of discussions on the difficulties of selling RE from inside a C corp. I linked you to three just by searching on shotgun, because I have used this illustration previously.

(In short, sell the entire corporation, not just the real estate. Instead of getting hit twice in the tax department, your clients would simply pay a capital gains tax on the stock.)

I will review the links provided ASAP and see if I can make any sense from them.

I did search for a few hours in index view but just used "LLC" as the keyword.

Kind Regards,

Frank

A C corporation has a chunk of real estate with a marginal basis. They are ready to retire and want to cash out. They can sell the assets for $10m. The corporate tax on that asset sale would be about $4m so the shareholders would net just $6m. So, anything over $6m in a stock sale is a win for the shareholders.

The folks I work with would look to buy the property inside the corporation for an amount in excess of $6m. A reasonable stock sale amount would be in the neighborhood of $6.5m to $7.2m. That puts $500k to $1.2m more in the pockets of the shareholders. That is a meaningful amount no matter who you are. As an added bonus, the buyer picks up any corporate liability going forward (*) and reimburses the corporation for any legal and accounting fees to complete the transaction.

(* Some shareholders have the mistaken belief that once they sell their assets and turn off the lights, their liability ends. Obviously, that isn't the case. Any liabilities will be guaranteed to the level of cash taken out of the company by the shareholders even if the company goes out of business.)

So, how can this be a good deal for the buyer? The buyer just picked up a $10m asset for just $7m. That is a 30% discount. The buyer is willing to forgo depreciation in order to put less capital into the deal. The buyer's intent is to hold the property long term. The key to making this transaction good for the buyer is an intent to hold until the cows come home. That can be quite a gamble but one some investors are willing to make.

For sellers who understand the tax liability innate to c corporations, this transaction is an easy sell. The problem comes where the seller doesn't want to hear about a discount. The seller's real estate agent has told him time and time again, the property will sell for $10m. The seller won't take anything less than a check for $10m. No matter how many times you try to explain that a $10m asset sale is the exact same net as a $6m stock purchase, the just don't get it. Many times real estate agents won't even present a stock offer because they don't understand it and they fear that they will get shorted on their commission. (They won't, by the way.)

---<skip this section if you don't like preaching to the choir>---

Our close rate is better than 70% when CPAs, financial planners or tax attorneys bring us transactions. When we find deals through a real estate agent and the seller doesn't have a trusted accountant, that drops to around 30%. I really wish more folks who own and manage businesses would invest in quality accounting and financial advice. A couple thousand dollars spent with a good CPA to explain C corp taxes could easily net shareholders a couple million dollars more or simply prevent a mistake in the first place. But, even when millions of dollars are in play, they feel that $150-250 an hour for advice is an unnecessary and frivolous expense. Penny smart and pound foolish if you ask me.

---<end preaching>---

Did that answer your question, Katie?

One more question, just out of curiosity -- why doesn't the real estate agent lose the commission, or at least get a reduced commission?

The real estate agent listed and marketed the property. In several cases, the agent has even bought us the transaction. Some listing agreements spell out what constitutes a sale and would cover a stock transaction. Other contracts don't. In either case, we feel that compensation is owed to the broker if for no other reason than the broker might have another transaction in which we are interested. That doesn't mean we won't try to talk an agent down on their percentage. {grin} But, that is just good business and a negotiation such as that would happen even with a pure asset transaction. Seriously though, we believe that being honest and fair is the only way to make it long-term in this business.

As for finding buyers, I work with a number of them. (You're right though. It takes a special breed to gamble with such a long timeline.) Finding the sellers is the hard part. I also know of a real estate brokerage office that has made C corporation property their specialty. If anyone needs help finding a buyer or a real estate agent that can move captured real estate, please let me know.

I'll certainly keep you in mind if I hear of any clients who want to dispose of trapped real estate.